Sec 29 of IBC law: Planned changes to fix grey areas

Planned changes to Sec 29A will fix grey areas in IBC law.

The new relaxation will allow bidders to show that, while they are related to defaulters, their businesses are quite distinct.

Given how powerful industrialists hoodwinked the banking system for decades, by not repaying loans and forcing banks to evergreen them—usually by using political contacts—it is not surprising that when the government was drafting the Insolvency and Bankruptcy Code (IBC), it made sure that such individuals were not allowed to bid for the companies they ran. If this was not done, these defaulters would be able to buy back their companies—in the IBC process—at discounts upwards of even 50-60%. The manner in which such defaulters were kept out was Section 29A of the IBC. Classes of people who could not bid included insolvents, people whose loans were classified as NPAs or who were willful defaulters. Even “connected persons”, or relatives in a broad sense, were excluded since the easiest thing for a defaulter would be to bid via a company owned by some relative.

It was because of this clause that, for instance, ArcelorMittal was forced to pay `7,000 crore of dues of Uttam Galva before it could bid for Essar Steel—in this case, LN Mittal was a promoter of Uttam Galva. This was also the reason why Numetal was not allowed to bid for Essar Steel since the principal shareholder of Numetal, Rewant Ruia, was the son of Ravi Ruia, one of the promoters of Essar Steel.

The government, as FE reported, is planning a change in Section 29A since the clause is also being misused to delay IBC proceedings. In the case of LN Mittal’s ArcelorMittal, one of the issues raised by Numetal was that the Mittal brothers—Pramod and Vinod—were defaulters, so ArcelorMittal needed to pay these dues also before bidding. That would normally have made sense, but the brothers split their businesses decades ago. The new relaxation will allow bidders to show that, while they are related to defaulters, their businesses are quite distinct.

Theoretically, should such a relaxation be made, Numetal can be allowed to bid if Rewant Ruia doesn’t have a shareholding in Essar Steel. Yet, as the Supreme Court judgment in this case showed, this is not necessarily true. In this case, the SC showed that while Numetal was owned by two companies—AHL and AEL—AEL sold its shareholding in Numetal to two trusts whose beneficiaries were companies owned by Rewant’s father Ravi and his uncle Shashi Ruia. Also, as the SC pointed out, the day before the government brought in the law to debar defaulters, part of the shareholding in Numetal was sold to some Russian firms to distance the Ruias from Numetal; this is why, while the Ruias were not in control of Numetal at the time of the bidding, the original promoters were ‘acting jointly’. This puts a big responsibility on the resolution professional whose job is not only to ensure defaulters don’t sneak into the bidding process, it is also to ensure the clauses are not used to unfairly keep non-defaulters out.